Real Estate Auctions: A New Twist on an Old Way to Sell Real Estate
in Pennsylvania
by Ray J. Michalowski, Esq.
In the past, real estate auctions were usually associated with the sale of properties for foreclosure, tax or estate purposes. However, in recent years the role of real estate auctions in the mainstream real estate market has expanded, giving REALTORS® a greater opportunity to participate in the auction process. Instead of viewing traditional real estate listings and real estate auctions as parallel paths that never converge, a growing number of REALTORS® have found ways to partner these services and provide exciting, new options for their clients.
The National Association of REALTORS® (NAR) Web site, www.realtor.org, has an Auction Resource Center, accessible to members only, that contains a wealth of information about the auction process. Information is presented on auction basics, the considerations that go into determining when an auction option is right for a property, seller, and/or market, and on the different ways in which REALTORS® can adapt their practice to participate in, and profit from, real estate auctions. In the auction news section of the NAR Web site it was noted that, “NAR actively supported the enactment of state laws requiring those who auction real estate to either hold a real estate license or conduct sales in conjunction with a real estate licensee.” As of June 2005, at least 29 states required that auctioneers must meet the licensing requirements for real estate professionals to handle all aspects of a real estate sale.
Pennsylvania, unfortunately, is not one of those states. Auctions and auctioneers in Pennsylvania are regulated by the State Board of Auctioneer Examiners, which enforces the Auctioneer and Auction Licensing Act (AALA). The Real Estate Licensing and Registration Act (RELRA) specifically exempts licensed auctioneers from needing a real estate license to sell real estate at a bona fide auction. The definition of “auction” in the AALA is broad enough so that a licensed auctioneer can legally advertise and conduct a real estate auction without the involvement of a real estate licensee in the process.
However, simply because a real estate license is not required in Pennsylvania to sell real estate at auction does not mean that REALTORS® can’t use auctions as a sales tool. REALTORS® have great skill in the sale and marketing of real estate that can be extremely valuable to the real estate auction process; while the licensed auctioneer can provide a REALTOR® with flexibility in their sales strategies. In some areas of Pennsylvania, it is not uncommon for REALTORS® to work together with licensed auctioneers to promote the sale of homes. One hybrid sales technique has the consumer agree to list the property with a real estate broker using the MLS as a means of procuring offers for a set amount of time. The second part of the strategy is to plan for and utilize a real estate auction as a way of generating offers if the property doesn’t sell during the initial listing period.
Because of the separate and distinct licensing acts governing auctioneers and real estate brokers in Pennsylvania, the offering of such hybrid or combined services can be tricky. Consideration must also be given to the requirements and limitations of the Real Estate Settlement Procedures Act (RESPA). RESPA may not apply to traditional “cash and carry” real estate auctions, but likely does apply in cases where combined REALTOR®/auctioneer services are offered and mortgage financing is involved. What follows is some practical advice on ethical and regulatory compliance for those REALTORS® who decide to utilize real estate auctions as a tool in their sales arsenal.
First, what kind of business relationships may be entered into between a real estate broker and an auctioneer? A person or business entity could choose to hold dual licensure under both AALA and RELRA and be subject to the requirements of both acts. Disclosure of the shared ownership of the two licensed entities would have to be given to consumers under RELRA, and also under RESPA if it applies. Alternatively, an auctioneer or auction house could simply affiliate, on a one time or ongoing basis, with a real estate broker, with each providing services authorized under their respective licenses. Again, any formal affiliated business arrangements should be disclosed to the consumer, and if RESPA is implicated, the costs of any shared business advertising should be split proportionally between the entities.
Who should the consumer pay? The consumer should contract separately for each service and pay any fees directly to the entity providing the service. This does not present a problem for dual licensees. Absent dual licensure, however, a consumer may not pay a real estate broker for the combined services and have the broker subcontract with an auctioneer to provide the licensed auction services. This would amount to the consumer paying the real estate broker for providing auction services, which is prohibited as unlicensed practice. Additionally, referral fees paid from real estate brokers to auctioneers are prohibited under RELRA, and where RESPA is implicated, referral fees paid in either direction would be prohibited as illegal kick-backs for settlement related services.
Finally, the use of the MLS by a REALTOR® in a hybrid listing-auction scenario should be handled carefully. Before listing a property that might be sold at auction, be sure to check with your MLS to see if has any specific rules for auction listings. A commonly heard complaint about such hybrid arrangements is that sellers often refuse to consider offers submitted by cooperating brokers when the time for the auction sale draws near. The Multiple Listing Service is a system for offering compensation to other REALTORS® who produce a buyer to purchase the listed property. When a seller is no longer willing to consider cooperating offers for the property, it is not available and should be removed from the MLS or changed to a status indicating its temporary or permanent unavailability. Failing to do so would amount to a misrepresentation by the listing agent that both the property and a cooperating fee are available. This could be a violation of the NAR Code of Ethics and might also violate the listing policies of the MLS.
Ray Michalowski is an attorney with Caldwell & Kearns, and serves as associate general counsel to PAR. A substantial portion of Mr. Michalowski’s practice is dedicated to providing licensure compliance services to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He is also one of the voices of the Legal Hotline.